Findings investigation into the lucrative interest regime

Summary

The State Secretary for Finance has informed the Lower House of the Dutch Parliament on the findings of the investigation into the lucrative interest regime. The key takeaway is that the current regime, which governs the taxation of for example carried interest for (private equity) managers, will remain unchanged for now. However, the recommendation is to initiate an internet consultation to explore potential alternatives and gather input from industry stakeholders and tax professionals.

Background

On 13 February 2024, the State Secretary of Finance (“State Secretary”) published the findings of its investigation into the taxation of management incentive schemes (i.e. carried interest, sweet equity etc.). These schemes are generally subject to taxation under the lucrative interest regime within the Dutch Personal Income Tax Act.
Pursuant to the lucrative interest regime, managers deriving income from these schemes are, in principle, taxed in Box 1 (remuneration for working activities) at the progressive tax rate of up to 49.5%. However, under certain conditions, managers may elect for taxation under the Box 2 regime subject to a lower tax rate for income from a substantial shareholding (2025: 31%).

The investigation was initiated by a motion passed by the Lower House of the Dutch Parliament in April 2024 (the “Motion”), requesting the government to ensure that income derived from a lucrative interest is exclusively taxed in Box 1. The Motion specifically addressed the taxation of carried interest, but reflects a broader legislative intent to tax income from a lucrative interest in general to Box 1, rather than Box 2.

Outcome of the investigation

In its report, the State Secretary of Finance acknowledges that abolishing the Box 2 option would disrupt the established administrative practice between the Dutch tax authorities and taxpayers. This administrative practice has proven to be effective and efficient in assessing whether a lucrative interest exists, avoiding valuation discussions and in determining whether a deemed remuneration is present for wage tax purposes upon the acquisition of a lucrative interest. Furthermore, abolishing the Box 2 option would result in a higher administrative burden for the tax authorities, would require transitional legislation for existing structures, could lead to increased disputes in the future and create more uncertainty under treaties for the avoidance of double taxation concluded by the Netherland.

As part of the investigation, the State Secretary has identified two lines of thought for a future lucrative interest regime:

Version A (taxation in Box 1):

• Income derived from a lucrative interest would no longer qualify for taxation in Box 2 as income from a substantial interest, but would instead be fully subject to taxation in Box 1.
• This effectively results in the abolition of the Box 2 route for lucrative interests. The State Secretary of Finance acknowledges that implementing this version would constitute a fundamental change of the lucrative interest regime, requiring significant legislative and administrative resources to ensure proper execution and enforcement.

Version B (taxation in Box 2 – multiplier):

• Income derived from a lucrative interest would still qualify for taxation in Box 2 as income from a substantial interest, but would be subject to a higher tax rate specifically applicable to taxpayers with a lucrative interest. The applicable rate should fall between the highest Box 1 rate (49.5%) and the Box 2 rate (31% as of 2025).
• The State Secretary of Finance indicates that this approach would administratively be more feasible.

Conclusion and advice

The State Secretary acknowledges that the Motion requests for a for a legislative change beyond a change in the tax rate. Nevertheless, the current lucrative interest regime has resulted in legal certainty for both taxpayers and the Dutch tax authorities. Abolishing the Box 2 route would disrupt the established administrative practice between taxpayers and the Dutch tax authorities, leading to significant implementation challenges and administrative burden. From the perspective of practicality and effectiveness, the State Secretary advises maintaining the current lucrative interest regime for the short term.

In the spring of 2025, an internet consultation will be initiated regarding the proposed alternatives. This consultation will allow tax professionals and industry stakeholders to provide input on the potential options. Furthermore, the State Secretary concludes that any legislative changes to the lucrative interest regime should not be implemented before the introduction of the new Box 3 regime, as both regimes must be properly aligned. Currently, the new Box 3 regime is not expected to take effect before 1 January 2028.

Questions?

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